October 3, 2022

Sunak Can Flex U.K. Stimulus Credit Card in Unfazed Markets

(Bloomberg) — Chancellor Rishi Sunak needn’t worry about getting the financing for another spending spree to support Britain through the Covid-19 crisis.

With growing pressure on him to refresh fiscal stimulus during a further six months of restrictions, near record-low bond yields show markets are unfazed at the prospect of more borrowing, safe in the knowledge that the Bank of England is on his side.

a screenshot of a cell phone: Easy Money

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Easy Money

The chancellor had hoped to ease off on spending that already pushed government debt to an eyewatering total above 2 trillion pounds ($2.6 trillion) for the first time, but a resurgent outbreak of the coronavirus has scuppered that plan.


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Instead, despite previous pledges that furlough support would stop at the end of next month, Sunak is now looking at aid including a German-style wage subsidy program. Whatever he borrows to fund it can be mopped up in due course by the U.K. central bank, whose asset purchases are likely to be expanded in coming months.

Read More: Explaining Kurzarbeit, or Saving Jobs the German Way: QuickTake

“There is no pressure coming from the markets because the BOE has bought all the gilts that have been supplied since the beginning of the Covid crisis.” said Mike Riddell, portfolio manager at Allianz Global Investors. “The BOE surely would extend and expand QE in the face of this, given the additional blow to the economy.”

Sunak will address lawmakers on Thursday at 11:45 a.m. in London. His plans could add to a bill that’s already set to empty Treasury coffers of 317 billion pounds, according to Institute for Government estimates.

Sunak previously warned that such levels of support are “not sustainable,” as he confronted a debt pile equivalent to more than 100% of economic output, the heaviest burden since the early 1960s.

Figures due Friday may show a further 35 billion pounds was added to the budget deficit in August, leaving Britain on course to borrow well over 300 billion pounds in the current fiscal year. That’s around 16% of GDP, the highest in peacetime.

City of London’s Fresh Exodus Cripples Stores That Just Reopened

But even before the fresh wave of infections, the chancellor faced calls from economists as well as some politicians to relax about racking up debt, and to extend support programs to help firms struggling amid ongoing consumer wariness, employment uncertainty and local lockdowns.

Almost 700,000 U.K. jobs were lost between March and July. As many as 10,000 positions are slated to go at British Airways Plc and 7,000 at Marks & Spencer Group Plc, while hotel operator Whitbread Plc plans to eliminate almost one in five roles.

With Prime Minister Boris Johnson telling citizens this week to work from home if they can for the next half year, Treasury officials are looking at a new initiative similar to Germany’s longstanding Kurzarbeit program, allowing employees to return to work on shorter hours.

a screenshot of a cell phone: Debt Costs

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Debt Costs

“Now is not the time to be talking about scare stories about government debt,” said Rory MacQueen, principal economist at the National Institute of Economic and Social Research. “There is no indication whatsoever that the current approach is causing any problems or any question marks to appear over the sustainability of government debt.”

The central bank’s own measure of the yield curve implies that rates will be at or below current levels for the next five years, meaning Sunak has little reason to withdraw spending at a time when that could prove far more economically damaging.

Not everyone is so relaxed. The growing global debt pile means quantitative easing by central banks will become a harder habit for governments to kick in the future, blurring the line between the monetary and fiscal authorities, according to Neil Williams, senior economic adviser to the International business of Federated Hermes, which has $628.8 billion in assets under management.

“It seems likely that sweeping ever-growing debt under the carpet will at some stage trip up policy-makers,” he wrote in an e-mailed report.

Markets are taking their cue from BOE Governor Andrew Bailey though, whose tandem act supporting the government’s borrowing plans contrasts with the tone of the institution during the global financial crisis in 2009. While it began quantitative easing then to aid growth, former Governor Mervyn King also made regular public suggestions that ministers should work out how debt would eventually be brought down.

a screenshot of a cell phone: BOE Role

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BOE Role

As new restrictions to slow the virus’s spread emerged on Tuesday, Bailey told business leaders that that officials will need strong evidence of a recovery before they think about tightening policy.

“We need a lot of confidence in a world of uncertainty and change that the economy really is heading back on track,” he said.

(Updates with Sunak speech time, IFG spending estimates and Hermes comment from sixth paragraph)

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